The FTSE 100 is now at 6,693, having started the month of July at 6,577 and started the year at 6,242. Initial market reaction to the UK’s vote to leave the EU was negative but very short-lived as stocks and bonds responded positively to expectations of a continuation of loose monetary policies. Sterling hit a 31-year low against the US Dollar on 5 July following the Referendum and remains comparatively low at 1.32 Dollars to the Pound. Currency translation effects have led to positive Sterling-based returns for global assets and company revenues.
There are still some significant global risks though – excessive debt, stagnant productivity, deteriorating demographics across developed economies and a prolonged slowdown in China. The latest global growth outlook was published by the International Monetary Fund last week. It cut its 2016 global growth forecast from 3.2% to 3.1%, and its 2017 forecast from 3.5% to 3.4%.
There are also political risks in play in the run up to the US presidential election and as the UK continues its negotiations with the European Union. This leads us to remain cautious and to expect markets to be unsettled in the coming months.
We are also keeping a close eye on the valuation of “bond proxies” – equities with a decent, secure, sustainable yield which can provide an income stream. Many of these stocks are now trading at very high valuations and we are monitoring how the managers of our preferred funds are approaching this situation.